OPPORTUNITY (ALMOST) LOST

The shale revolution has created huge investment opportunities in the US, driven down energy bills and made North American businesses more competitive. Has dithering Europe already missed the boat?

By Steven Ferrigno

OPPORTUNITY LOST

You’d have to have been hiding in a cave with a candle not to have heard something about The Shale Revolution these past 12 months. One headline calls it the future of affordable energy. Another says fracking is the embodiment of environmental evil. Battalions of activists, lobbyists and journalists have mobilised for and against.

That’s because shale gas is turning out be as disruptive as the internet, but with potentially game-changing benefits for European energy investors, businesses, or for that matter anyone with a household utility bill to pay. Look at what’s happened in North America in just three short years: natural gas prices have plummeted, coal has been pushed aside as an electricity source, a rejuvenated manufacturing sector is humming along on the back of low energy costs, and now abundant natural gas looks to make the continent a net exporter of fuel in the next 5-6 years.

If that happens, Europe could find itself awash in cheap LNG imports – dampening enthusiasm for investments in any homegrown shale production industry. But we won’t have to wait that long to see the risks in letting America extend its lead. With so much gas available, coal has been discarded for power generation andEuropean utility companies have been eagerly buying it up – even building new coal plants to take advantage of the low price. Perversely given the EU’s environmental commitments, there has even been an uptick in our carbon emissionswhilst US emissions have gone down.

On almost every level Europe is missing the boat on shale. The question is, can we ever catch up?

Steven Ferrigno Allegro

What we’re missing

With the invention of reliable hydraulic fracturing technologies in the 1990s, unconventional gas and light, tight oilhasutterly transformedAmerica’s energy outlook. By 2010, shale production in the US had soared to ten billion cubic feet per daywith the potential to quadruple by 2040. Gas prices have dropped dramatically whilst billions have been created in new investment and job growth.

Low estimates of the amount of shale gas technically recoverable in Europe suggest at least2.3 trillion cubic metres (tcm) compared with 13 tcm in the US. A smaller opportunity, but the potential impact on European economiesis more than tantalising:

Estimates from the International Association of Oil & Gas Producers suggest a domestic shale production industry could generate upwards of one million jobs in Europe, many of them in areas hard hit by the recession and Eurozone woes

With our current reliance on Russian gas, Europeans will also take note of shale’s geopolitical dimension. The US is reducing its imports of Middle East oil, making political relationships there less driven by energy dependency

The environmental arguments in favour of shale are actually more compelling and measurable than those against. Shifting to a higher proportion of gas use in energy production will help curb our carbon dioxide emissions. Limiting gas production or consumption, on the other hand, pushes us inevitably back to coal.

With the amount of coal-generated electricity rising in some European countries at an annualised rate of 50 percent, we are already seeing a ‘new golden age of coal’. The result? Despite decades of political and industrial effort to move the renewables agenda forward, the International Energy Agency (IEA) reckons coal will account for 25-30 percent of the global energy mix in 25 years’ time – exactly what it was 25 years ago.

Which is not to say that a European shale boom is a dead cert. Typically, shale gas and oil resources in Europe are trapped in rock layers much deeper in the ground, substantially raising the difficulties of exploration and the costs of extracting viable shale deposits when they are found. The operational reality and structure of fossil fuel production in Europe is also very different from North America’s. Oil extraction here happens mainly offshore. Population density and differing rules about mineral rights mean that there has never been a ‘wildcatting’ exploration culture. The result is that the USA has roughly 2,000 oil rigs, compared to 72 across the whole of Europe.

Population density also means that we don’t have the wide open expanses that you find in Alberta or Texas. By way of comparison, the Marcellus Play in the US encompasses roughly 95,000 square miles—equivalent to the size of the whole United Kingdom. Our own Bowland Shale (the largest in the UK) is 500 square miles.

Ultimately, we need to start drilling drill if we’re going to know for sure how big the opportunity is for industry, investors and society at large.

What’s holding us back

Despite recent positive signs in the UK, politics and green activism —particularly in Western Europe – may be the biggest hurdles to overcome if any of shale’s North American benefits are going to be replicated here.

Environmental worries around fracking have so dominated European debate that very little discussion about economic prospects has been able to surface. Public outcry in the Netherlands and Germany has made those governments hesitant to exploit their potential reserves, andFrance has banned fracking altogether. The overall response to shale from European industry, meanwhile, has been muted or at best ambiguous. We are only now seeing signs that it is waking up.

Has the penny finally dropped?

The UK government has just, belatedly, launched a licensing regime for shale exploration alongside tax incentives for local councils to speed up approvals. Total is the first major to jump behind that opportunity and there have been other positive signs, notably Chevron’s deal with Ukraine in November. A good start –but more needs to be done.

Shale gas has the potential to reduce European energy prices, boost employment, create investment opportunities and move us off the current path to more and more coal consumption. If we don’t act quickly, arguably with the EU in the lead, the prospect of cheap US fuel exports threatens to smother the development of any nascent European shale industry.

As an energy sector stakeholder I have a four-point proposal

Prepare to manage risks in a chaotic environment. Derivatives traders, energy companies, utility companies, and energy-intensive businesses of all kinds need to treat the next 5 years as an extremely unsettled time in the market. Understanding and managing the risks of shale investments in your portfolios needs to be a top priority

Unleash shale gas exploration – now. The rest of Western Europe needs to follow the UK’s lead in directly supporting shale exploration to quantify the scale of opportunity in each country

Reassure European voters that shale gas points us in a greener direction, even if it isn’t a perfect solution in and of itself. An industry consensus on codes of conduct for exploration such as those outlined in the IEA’s ‘Golden Rules for a Golden Age of Gas’ would go a long way to seeding public confidence

Counter junk science. The environmental concerns about fracking have been overblown and the industry must make a concerted communications effort to debunk myths where they occur with hard facts and evidence

Whether or not European shale gas production could ever replicate what’s happened in North America is simply unknown. Exploration needs to happen now if we’re going to find out.

Steven Ferrigno is Managing Director, EMEA for Allegro Development Corporation, www.allegrodev.com. He is based in London.